The Governor of the Central Bank, Josef Bonnici, has spoken. But will the commercial banks listen?
Addressing the annual dinner organised by the Institute of Financial Services – traditionally, a speech that is carefully scrutinised by the hundreds of decision-makers present – he called on the banks to cut their interest rate margins, saying this would boost economic growth.
He subsequently explained in an interview with Times of Malta Business that he was aware that this could impact banks’ profitability but made it clear that, even if their core operating profits were being squeezed, they still made plenty of money. After all, he noted, they could always become more efficient and reduce their costs.
He was also critical of the fact that banks are not always proactive enough, pointing out that the European Central Bank made available plenty of cheap money, which banks could then loan out at lower rates.
The banks in Malta are not short of funds: quite the contrary.
It is all very well keeping liquidity to meet the ever-more stringent regulatory requirements but banks have plenty of money to loan out if only there were more people willing to borrow.
This is, of course, Prof. Bonnici’s point: that there is a thirst for finance, particularly from small businesses, and that they would borrow if it were cheaper.
He substantiated his argument by pointing out that the lower-interest Jeremie funds were fully subscribed.
The banks are hardly about to reduce their loan interest rates without a fight. Yet, customers regularly complain that ECB interest rate cuts do not filter down to the local banks or that if they do, it tends to be after some delay, and only partly.
Banks will argue that if they cut interest rates on loans, they would have to do so on deposits. Moreover, profit is not a dirty word and shareholders expect the banks to maximise the return on their investment.
They will also undoubtedly point out that this is a free market and that they should be free to set rates as they see fit.
The argument about whether there is true competition in a sector dominated by two players is perhaps not the strongest one to make.
However, the Governor is not asking for a price war. He is well aware that the main banks have conservative risk profiles and that it is not in anyone’s interest to tamper with them.
He has no interest in undermining the banks’ sustainability but he clearly feels that the profit expectations are simply greedy and the needs of the economy more important.
What if the banks ignore his opinion? They are already facing a probe into bank charges. While these were not found to be unreasonable when the MFSA last checked, Prof. Bonnici believes that is no longer the case.
What other stick could be brandished? Could there be talk of a windfall tax, which would generate funds that could perhaps be ring-fenced to subsidise loans to small businesses?
What would the impact be of any imposition on the perceptions of the sector and all its stakeholders?
The financial services sector is already feeling very uncomfortable being associated with a country ridiculed internationally because of the citizenship sale.
However, no matter how genteel the discussions are between the Central Bank and the commercial banks, there are millions of euros at stake and thousands of people who would be affected.